Research Notes: Is Live Ventures An Easy Short — Or A Transformed Long?
LIVE's checkered history and cheap valuation create an interesting debate
Only a few years ago, LIVE was a penny stock with a number of red flags.
A series of successful acquisitions (so far) has changed the story, and underpin a valuation that looks at least reasonable.
There are enough risks here to stay on the sidelines, but management will have the ability to address some of the core risks with the next earnings report.
A Little Background
From one perspective, Live Ventures LIVE 0.00 looks like an easy short. The company:
has a clear, long, and documented history of stock promotions surrounding its stock;
is facing cyclical risk in multiple segments; and
closed fiscal 2022 (ending September) with net leverage of 2.1x Adjusted EBITDA, then levered up further to acquire another cyclical business in December.
On the other hand, LIVE also:
may have gotten its corporate act together, perhaps in part because its chief executive officer took over when he was only 28;
looks rather cheap on a consolidated basis, trading at less than 6x FY22 EBITDA;
and looks even cheaper on a sum-of-the-parts basis, with (at least) two business units potentially worth close to the current market capitalization.
Add in a valuation that is very much in the eye of the beholder, and LIVE is one of the more interesting “value trap or value play?” debates in the market. At the moment, we’re not picking a side. But it’s possible an opportunity does arise — from either the long or short side.
How We Got Here
Live Ventures was founded in 1968 as Nuclear Corporation of New Mexico. 55 years later, that’s probably still a point in favor of the short case. In the 1990s, it became yp.com, with the ‘yp’ short for “Yellow Pages”; yp.com was eventually sold to AT&T T 0.00 in 2008.
The year before, (what was then YP.com) acquired LiveDeal.com, an online classified operator. After the sale of YP.com (for $3.85 million), the company focused on online marketing for small businesses.
In the fourth quarter of 2011, 28-year-old Jon Isaac became the company’s largest shareholder, which was not as impressive as it sounds: in the fourth quarter of FY11, LiveDeal’s market cap topped out at about $8 million. Isaac was named CEO in early 2012.
In 2013, the company shifted LiveDeal to become an ostensible competitor to Groupon GRPN 0.00. (Live Ventures still owns LiveDeal, but the business appears to be tiny; it’s no longer even mentioned in securities filings.) Like Groupon’s other rivals (and, over time, Groupon itself), LiveDeal.com failed to gain traction.
In 2015, LiveDeal decided to become a holding company renamed Live Ventures, and made its first acquisition of size, paying $30 million for polyester carpet manufacturer Marquis Industries. The following year, Live Ventures spent $60 million for retailer Vintage Stock. In 2020, steelmaker Precision Industries came aboard. And then last month, Live Ventures added retailer Flooring Liquidators for $84 million.
A Questionable History
To sum up, Live Ventures started as a Nevada-incorporated resource company, became a shell company, became a dot-com bubble winner and loser, and then became (essentially) a shell company again. And while the businesses owned by the company look like real businesses, there is some highly questionable history here.
Most notably, LiveDeal and even Live Ventures, have been the target of aggressive stock promotions. In 2014 (as noted in a Seeking Alpha article), a firm sent out mailers saying LiveDeal was beating Groupon in California:
source: Seeking Alpha
Admittedly, those mailers were sent on behalf of a third-party, not Live Ventures itself. Whoever that shareholder was paid ~$900,000 for the mailer; the second-largest shareholder after Isaac had a position whose value topped out at ~$7 million during calendar 2013.
In late 2016, the promotions returned. Again on Seeking Alpha, Richard Pearson (who had uncovered a ring of promoters that eventually faced SEC charges) highlighted multiple paid promotions, as well as some potentially aggressive accounting.
Those promotions almost certainly were not the only ones. Indeed, the long-term chart shows a number of brief, steep rallies throughout the 2010s that fade almost instantly:
The Case for LIVE
Of course, the chart also shows substantial upside in recent years. LIVE has more than quadrupled since the end of 2019.
Those gains unequivocally have not come from promotions of any kind. Rather, Live Ventures seems to have bought some quality businesses at attractive valuations.
The Flooring Manufacturing segment, which includes Marquis and Better Backers (acquired for $3.2 million in July), generated $17 million in Adjusted EBITDA in FY22. In other words, Live Ventures paid less than 2x EBITDA for the business. The economy is helping, yes, but the business is not at near-term peak earnings: segment-level EBITDA was $23.7 million in FY21. Segment operating income more than doubled from FY16 to FY22, a ~13% annualized growth rate.
Vintage Stock, a retailer of movies, music, and video games, cost $60 million. It generated $14 million in EBITDA in FY22. Operating income in that segment has grown 40%-plus since FY17, but it appears likely that a shift of LiveDeal out of what is now the Retail segment has helped. But even ~flat results for a model akin to that of GameStop GME 0.00 aren't bad, particularly at 4.3x EBITDA.
Finally, just 30 months ago Live paid ~5x FY21 EBITDA for Precision, a maker of tool and die steel. It spent another $25 million for industrial knifemaker Kinetic, which helped drive a ~55% increase (~$3.6 million) in segment Adjusted EBITDA despite being on the books for only ~one-third of the year.
There have been some misses. The most concerning came in 2017, when Live spent $6.5 million for retailer ApplianceSmart. ApplianceSmart was helmed by Tony Isaac, Jon Isaac’s father, and its chief financial officer was the CFO of Live Ventures at the time. ApplianceSmart filed for Chapter 11 in 2019.
Last year, Live agreed to pay $7 million for broker-dealer Salomon Whitney. The deal was structured with the upfront acquisition of 24.9% of the company, with the remainder of the equity coming after Live received approval from FINRA (Financial Industry Regulatory Agency). Live changed its mind, however, and from the 10-K (this is not legal advice) now appears to have paid the full $7M for one-quarter of the business. Live Ventures took a $4.9 million impairment in the fourth quarter.
Still, overall, this looks like a real business. It’s a somewhat goofy business, to be sure: a holding company that includes a mini-GameStop with 68 locations, a steel plant, a knifemaker, a minority stake in a broker-dealer, a carpet company, and now a flooring retailer.
But the promotional activity seems to have stopped, and this feels like a more mature business. (For instance, the company deducted from 2022 Adjusted EBITDA a non-cash gain on the ApplianceSmart bankruptcy. In contrast, as Pearson noted six years earlier, the company was trumpeting EPS figures that consisted solely of non-cash gains.) There are still some concerns. In July, for instance, Better Backers entered into leases with an LLC solely owned by Isaac. Isaac has loaned the company money in the past (and still has warrants as a result), and is funding a portion of the most recent acquisition. But that seems more a result of a lack of credit than Isaac using the company as his personal piggy bank.
And, assuming exercise of options and warrants, Isaac owned 50.6% of the company at Dec. 31. Last week, in talking about the potential traps in sum of the parts cases, we highlighted the risk that management is more interested in empire-building (or simply continued employment) than catalyzing value.
With equity holdings in LIVE now worth ~$50 million, Isaac’s interests are well-aligned with those of minority shareholders. Whether or not that was always the case might well be irrelevant.
The Flooring Liquidators Deal
That said, one obvious concern is that, to some degree, these businesses are all cyclical. And, to some degree, they all benefited from the post-pandemic environment.
The Flooring Liquidators acquisition steers right into that concern, rather than away from it. Buying 20 “warehouse-format” stores (plus a design center) in California and Nevada on (possibly) the tail end of a housing bubble is an aggressive step, to put it mildly.
And one problem is that we don’t have much information on the nature of the deal. Live hasn’t disclosed much in the way of financials, save for projecting that the acquisition will add “about $125 million per year” to revenue. It’s not clear whether that’s a projection of FY23 sales, CY23 sales, or a backward-looking measure.
Peers don’t really help. LL Flooring Holdings LL 0.00, the owner of Lumber Liquidators, is valued at less than $500K/store. On an enterprise basis, Floor & Decor FND 0.00 is worth ~$55 million per location. Live is paying ~$4M for each Flooring Liquidators store. Without clarity on profit margins, it’s exceptionally difficult, if not impossible, to know if that valuation is aggressive or conservative. That aside, success here likely comes down more to footprint expansion than anything else.
The good news for LIVE is that the margins don’t have to be that impressive for valuation here to work. As of the end of FY22, enterprise value was ~$200 million, or a little over 5x consolidated Adjusted EBITDA of $38.3 million.
Move the pro forma EV to ~$285M, and even in the context of businesses that don’t necessarily merit high multiples, 10% EBITDA margins on ~$125M in revenue gets pro forma Adjusted EBITDA to $50 million-plus, and keep EV/EBITDA below 6x. That’s probably good enough for upside at some point if the already-owned businesses simply hold up.
There’s real value in the optionality of Flooring Liquidators as well. If that concept works out, it alone can drive significant upside in the stock. Floor & Decor, for example, has an enterprise value over $10 billion.
Admittedly, the increased leverage adds risk. We’re probably looking at net leverage in the 3x EBITDA range at this point. And the proportion of that EBITDA (before corporate costs) is something like:
50%-plus from flooring, between manufacturing and retail;
~25% from a video game/CD/vinyl retailer;
~20% from steel and industrial knives.
It doesn’t necessarily take a full-blown recession for those profits to fall under strain. Cut EBITDA from our rough estimate of $50 million-plus to $40 million (~200 bps in margin compression plus modest revenue declines) and net leverage is ~4x. In that scenario, LIVE pretty easily can get halved, assuming it receives a low 5x EV/EBITDA multiple. And while the acquisitions to this point look like winners, we (again) don’t have a sense of what kind of profit and cash flow Flooring Liquidators is driving. That in turn makes it difficult to even judge the logic of the purchase.
As a result, it gets difficult to pound the table too forcefully for LIVE in either direction. First quarter results should arrive this month, and may give some more color. For now, LIVE looks probably undervalued — on paper.
The SOTP Risks
One potential reason for optimism is that Live Ventures could wriggle out of financial trouble by selling one of the businesses. Pro forma net debt of $150 million likely could be halved and then some by exiting the carpet manufacturing business. An exit from Precision would be a less aggressive move, but one that would probably forestall any near-term financial difficulties, should they arrive.
But one of the problems we highlighted last week was the difficulty in translating paper valuations to actual cash. And Live Ventures seems likely to face that problem if and when it decides to sell any of its businesses. It owns businesses that are not necessarily easy to move, and at the least don’t have a natural source of buyers. (This seems most true for Vintage Stock, which actually might have made sense for GameStop last decade, when it tried to lean into collectibles through the acquisition of ThinkGeek.)
A strategy of owning those businesses and milking them for free cash flow probably makes some sense. It would be helpful if Isaac emphasized that strategy going forward. This is a business that probably needs to deleverage after the Flooring Liquidators deal. That’s just one of the things that investors need to see. But there’s enough here for LIVE to be worth the look.
As of this writing, Vince Martin has no positions in any securities mentioned.
If you enjoyed this post you can help us by clicking the heart ❤️
Disclaimer: The information in this newsletter is not and should not be construed as investment advice. Overlooked Alpha is for information, entertainment purposes only. Contributors are not registered financial advisors and do not purport to tell or recommend which securities customers should buy or sell for themselves. We strive to provide accurate analysis but mistakes and errors do occur. No warranty is made to the accuracy, completeness or correctness of the information provided. The information in the publication may become outdated and there is no obligation to update any such information. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Contributors may hold or acquire securities covered in this publication, and may purchase or sell such securities at any time, including security positions that are inconsistent or contrary to positions mentioned in this publication, all without prior notice to any of the subscribers to this publication. Investors should make their own decisions regarding the prospects of any company discussed herein based on such investors’ own review of publicly available information and should not rely on the information contained herein.